German small and medium-sized enterprises (Mittelstand) have long been regarded as the backbone of Germany's economy. These businesses are often referred to as "hidden champions," being the main players in exports. They are generally not well-known to the outside world, but they are leaders in specific market segments. Today, they are facing unprecedented competitive pressure from Chinese manufacturing.
According to a report in The Wall Street Journal on July 3rd, for decades, these German specialized manufacturers, known for their high quality and advanced technology, have maintained a prominent position in the global market due to their 'unparalleled quality advantages'. However, this advantage is being gradually eroded by the rapid upgrading of Chinese manufacturing. As Chinese companies narrow the technological gap and enter the market at significantly lower prices, the sense of urgency for German manufacturing is increasing.
The report indicates that German small and medium-sized enterprises, consisting of thousands of companies specializing in capital goods such as machinery and industrial components, as well as intermediate products, were once the core driving force behind Germany’s economic growth. However, Chinese manufacturers now not only match German quality standards, but also offer prices in many areas that are half as low as those of their European counterparts.
German Menden family's pipe factory workers use cranes to transport newly cast copper alloy rods. Visual China
As competition intensifies, anxiety is spreading in the hinterlands of German manufacturing. Some industrial towns that have maintained prosperity for a long time are beginning to lay off employees. For Germany, which relies heavily on manufacturing, this competition could have far-reaching effects on the economy and even politics.
According to reports, Germany has now for the first time imported ‘advanced capital goods’ from China in larger quantities than exports to China. German manufacturing companies are facing increasing competitive pressure not only in the Chinese market but also globally and even locally. Many companies have begun reducing production and laying off employees, and some have even transferred part of their capacity to China.
Aura is a mechanical manufacturing company located in southwestern Germany. The company has approximately 115 employees and annual sales of about $30 million. It mainly produces heating systems required for industrial equipment, which can be used in presses, ovens, extruders, and other equipment.
The company's general manager, Patrick Berkhart, said that in just the past six months, there has been a significant increase in Chinese competitors, resulting in a decrease in the company's orders. "In order to win projects from German and Japanese customers, we have to find more ways to enhance our competitiveness."
According to a report released by Ernst & Young (EY) in May this year, the German industry is currently losing more than 10,000 jobs per month on average. From February 2022 to early 2026, Germany's industrial output decreased by approximately 10%, with energy-intensive industries experiencing a decline of more than 15%.
According to data from Apollo Global Management, a New York-based investment firm, the trade in capital goods between Germany and China has shifted from a surplus of approximately 750 million euros in mid-2024 to a deficit of about 500 million euros as of August 2025. In the first quarter of this year, exports of German machine tools to China decreased by about one-third compared to the same period in previous years.
According to Noah Baer, a senior advisor at the research organization Rhodium Group, if Europe fails to introduce stronger industrial support policies, German medium-sized manufacturing companies may face rapid decline.
Meanwhile, the EU is considering introducing more trade protection measures in response to competition from China. Data from Chinese customs shows that in the first five months of this year, China's exports to Germany increased by 17%, and exports to the EU increased by 16%.
The Wall Street Journal reports that Chinese companies are actively exploring overseas markets, resulting in a trade surplus of about $1.2 trillion last year. In recent years, China has continuously promoted the development of specialized and innovative enterprises. Through policy support, industrial chain collaboration, and technological innovation, it has continuously enhanced the overall competitiveness of the manufacturing industry, enabling more and more specialized enterprises to become internationally competitive.
However, German industry insiders believe that in some high-end fields such as laser equipment and precision optics, German companies still maintain a leading position. For example, companies like Trotec and Zeiss still have high technical barriers, but Chinese companies are also continuously advancing their independent research and development efforts.
The report also noted that today, both new factories in Eastern Europe and South America are increasingly inclined to purchase complete industrial systems from Chinese suppliers, including injection molding machines, robots, drying equipment, and comprehensive industrial software solutions.
Meanwhile, German manufacturing is also affected by high energy prices and weak demand in European markets.
German Ifo Economic Research Institute Director Clemens Fust said that in industries with significant economies of scale, such as heat pumps and automobiles, competition among Chinese companies is particularly fierce. While highly specialized enterprises still maintain certain advantages, there is still considerable uncertainty in their future development.
It is worth noting that German manufacturing companies, which have long advocated free trade, are now increasingly calling for the EU to introduce more trade protection measures.
The German Association of the Machine Building Industry (VDMA) stated that Chinese companies currently account for about one-third of the global manufacturing output. If this proportion continues to increase, German companies will face greater competitive pressure.
In the past two years, the number of trade investigations launched by the EU against China has reached a new high, but the scope of these investigations remains relatively limited. The EU is discussing more extensive trade defense measures, although it is expected that these measures will take some time before they can be officially implemented.
However, some German businesspeople believe that the current difficulties of Germany's manufacturing industry cannot be entirely attributed to Chinese competition.
Michael Puls, who has long served as a senior executive at Siemens and is currently the executive chairman of Oeriac, said that the bigger problem for Germany's manufacturing industry is the persistent high costs within the country, as well as the lack of motivation for corporate reform. "China does become more competitive, but Germany needs to truly carry out reforms and move out of its comfort zone," he said.
A survey conducted earlier this year among German mechanical engineering companies found that more than three-quarters of the surveyed companies regard competition from China as the current greatest strategic challenge worldwide.
Aura Company CEO Burkehart stated that not only Chinese customers, but Japanese and German customers are increasingly hoping to have their products manufactured in China. The main reason remains cost advantage. Currently, the company's product has about 20% of production within China. If the European operating environment doesn't improve, this proportion may rise to 70% in the future.
"We are in a very difficult period. This is a historic change, and the entire society will be under pressure as a result," he said.
Regarding the European side's frequent mention of claims such as "overcapacity in China" and "unfair competition caused by Chinese subsidies" in recent years, China has responded multiple times.
The Chinese Ministry of Foreign Affairs previously stated that the development of China's new energy and manufacturing industries is the result of continuous technological innovation, the improvement of industrial chains and supply chains, and full market competition. It is not achieved through subsidies to gain a competitive advantage. Sino-European economic and trade cooperation is essentially based on complementary advantages and mutual benefit and win-win results. It is hoped that the European side will view China's development objectively and rationally, adhere to the principles of a market economy and WTO rules, and provide a fair, just, and non-discriminatory business environment for Chinese enterprises investing and operating in Europe. Politicalization or generalized security concerns should be avoided in normal economic and trade cooperation.
The Chinese Ministry of Commerce also stated that trade protectionism cannot solve the problem of European industrial competitiveness. Imposing additional tariffs will only increase corporate costs and disrupt the stability of the global industrial chain and supply chain, ultimately harming the interests of both European enterprises and consumers. China hopes that the European side will properly handle economic and trade differences through dialogue and negotiation, and jointly maintain an open and cooperative international trade environment.
